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Quarantine and the Accidental State and Local Tax Resident

Richard Goldstein, J.D.

5.20.20 | Client Alert – COVID-19 Update

The COVID-19 crisis has drastically altered the normal rhythm of our lives. Many who have quarantined and relocated to avoid COVID-19 hot spots may inadvertently acquire a new state and/or local income tax resident status.

How Does This Happen?

This occurs because many states and cities (including New York State, New York City, New Jersey and Connecticut) determine tax resident status, in part, based on the number of days a person is present in the state or city.  Typically, a person who spends more than 183 days in a state or city where they maintain a residence becomes a resident for income tax purposes.  This is called statutory residency (not to be confused with domicile, which also has resident income tax consequences in addition to estate tax implications).

Consider the following statutory resident example:

Assume Jane lives (is domiciled) in Greenwich, Connecticut and works for ABCD, Corp. Jane works in both ABCD, Corp.’s Greenwich, Connecticut and New York City offices. Historically Jane has filed Connecticut resident income tax returns and New York nonresident income tax returns.  Jane owns a beach house in East Hampton, New York.  Prior to 2020, Jane was never present in New York for more than 183 days in any calendar year.  During the COVID-19 crisis, Jane worked from her beach house in East Hampton.  Jane spends more than 183 days in New York during 2020 in part because she worked from her East Hampton beach house.  As a result, Jane is a New York State statutory resident for income tax purposes in 2020.  Jane is also a resident of Connecticut in 2020 because she is domiciled in Connecticut.

State residents who are generally subject to tax on all of their income shoulder a larger income tax burden than nonresidents who only pay tax on income earned within the state or city. Residents generally are permitted to claim a state tax credit on their resident income tax return for taxes paid to another state on income earned in the other state (although the credit is not always sufficient to avoid double taxation).  As demonstrated in the example above, a person can be a tax resident in more than one state.  Unfortunately, unearned income (i.e. interest, dividends, capital gains, etc.) may be subject to tax in multiple states without any offsetting credits.

Careful Monitoring is Essential

Taxpayers who do not monitor the number of days that they are present in states (and cities) which have enacted statutory residency laws may be in for an unpleasant surprise (as in “surprise you are now a tax resident”). Therefore, it is important, perhaps more than ever, to monitor the number of days spent in any state (or city) where you maintain a residence to avoid triggering statutory resident status.

Questions? Contact Richard Goldstein at 212.331.7557 | rgoldstein@berdonllp.com or Wayne Berkowitz at 212.331.7465 | wberkowitz@berdonllp.com or reach out to your Berdon tax advisor.

Berdon LLP New York Accountants